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Technology Stocks

Idex has consistently generated returns on invested capital in the upper midteens

Business Strategy and Outlook 

Idex owns a collection of moaty businesses that tend to be leaders in their respective niche end markets, typically holding the number-one or -two market share. It manufactures a wide array of products, ranging from equipment used in DNA sequencing to wastewater pumps to Jaws of Life hydraulic rescue tools. Idex’s lean manufacturing process allows it to effectively operate in a high-mix and low-volume environment, offering customers a wide variety of highly engineered products that are configurable or customizable. Furthermore, a common theme across its businesses is that they specialize in making mission-critical equipment that performs a vital function but typically constitute a small part of the customer’s total bill of materials. This aspect of the business contributes to Idex’s narrow moat through customer switching costs and allows the firm to command premium pricing. In the long run, Idex can be viewed as a GDP-plus business. Organic sales growth will continue to outpace industrial production by around 1%-2% annually as the firm’s commitment to innovation and investments in research and development continue to bear fruit and generate additional revenue through introductions of new or refreshed products. It can be projected organic sales to grow at a roughly low-single-digit clip in fluid and metering technologies as well as the fire and safety segment and the diversified products segment, and at a mid-single-digit rate in the health and science technologies segment.

Additionally, the firm will continue to supplement its organic sales growth with acquisitions. Historically, management has avoided overpaying for acquisitions. As such, despite regular mergers and acquisitions, which add goodwill and assets to the firm’s capital base, Idex has consistently generated returns on invested capital in the upper midteens. Management has remained disciplined in the current elevated valuation environment, and it will continue to manage acquisition risk appropriately and focus on maximizing returns on invested capital.

Financial Strength

Idex maintains a sound capital structure, which will help the firm navigate the uncertainty due to the coronavirus pandemic. As of Dec. 31, 2021, the firm owed roughly $1.2 billion in short- and long-term debt while holding approximately $0.9 billion in cash and cash equivalents. The company can also tap into its $800 million revolving credit facility. Idex will generate average annual operating cash flows of roughly $800 million over the next five years. Given its healthy balance sheet and solid cash flow generation, Idex is adequately capitalized to meet its upcoming debt obligations. Idex will have a debt/adjusted EBITDA ratio of roughly 1.5 times in 2022. Management will continue to prioritize investing in organic growth and executing M&A, growing the dividend, and allocating excess capital to opportunistic share repurchases. The firm has raised its quarterly dividend by an average annual rate of roughly 10% over the last five years, and the dividend will keep growing roughly in line with earnings. The payout ratio will remain around 30% over the next five years.

Bulls Say’s

  • Idex has a portfolio of moaty businesses that have leading shares in niche end markets. 
  • Idex generates strong free cash flows, which have averaged around 16.5% of sales during the last 10 years. 
  • Recent acquisitions of Akron Brass and AWG, as well as new product introductions (including eDraulic and SAM), have reinforced Idex’s already strong competitive position in the fire and safety business

Company Profile 

Idex manufactures pumps, flow meters, valves, and fluidic systems for customers in a variety of end markets, including industrial, fire and safety, life science, and water. The firm’s business is organized into three segments: fluid and metering technologies, health and science technologies, and fire and safety and diversified products. Based in Lake Forest, Illinois, Idex has manufacturing operations in over 20 countries and has over 7,000 employees. The company generated $2.8 billion in revenue and $661 million in adjusted operating income in 2021.

(Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks Shares

Humana appears focused primarily on organic growth, it remains open to partnerships and acquisitions, too

Business Strategy and Outlook 

In the U.S. healthcare system, Humana pays caregivers to provide services through an integrated and value-based approach while also making the insurance experience easy to navigate for end users. Perhaps not surprisingly, given its founding as a nursing home in the 1960s, the firm has a special focus on serving the elderly population, especially in its top-tier position in administering Medicare Advantage plans. Given U.S. demographic trends and the increasing penetration of Medicare Advantage plans in the eligible population, Humana remains at the forefront of one of the fastest-growing areas in U.S. health insurance.

Within Medicare Advantage, insurers like Humana are paid the same amount that the traditional Medicare program pays to provide benefits for its consumers; then the insurer aims to lower the costs associated with caring for users by making them healthier while also providing them additional benefits and generating a profit. Given that dynamic, incentive alignment with care providers remains more important in this product than in other health insurance products and Humana sees this alignment as its key differentiator from other health insurance players. For example, about two thirds of its Medicare Advantage members have primary-care physicians that operate in value-based arrangements, which encourage those caregivers to improve quality and costs. Humana owns some of these caregivers, including primary-care practices and the planned acquisition of the largest home healthcare provider in the United States, Kindred at Home. Also, the firm provides pharmacy benefit management functions, managing that key health input in an integrated fashion primarily for internal members. While especially powerful in the Medicare Advantage market, this integrated approach benefits Humana in its other target markets too, including Medicaid, military, and small-employer plans. With large opportunities in its target markets, management aims to continue growing at a fast pace with a long-term annual earnings per share growth goal of 11%-15%. While Humana appears focused primarily on organic growth, it remains open to partnerships and acquisitions, too.

Financial Strength

Humana maintains a healthy balance sheet. Most of its cash ($3.4 billion at the end of 2021) is held at its subsidiaries, though, and the company aims to hold about $500 million of cash at the parent company typically ($0.9 billion at the end of 2021), which constrains its liquidity a bit. Humana owed $12.5 billion in debt, or 44% debt/capital by the calculations at the end of 2021, which is above management’s typical leverage after the Kindred at Home transaction in 2021. With the divestiture of some non core businesses from that transaction expected in 2022, the leverage to start falling toward the company’s target of 35% in 2022, although share repurchases may constrain that transition a bit. With limited capital expenditure requirements, free cash flows to typically range between about $4 billion-$5 billion annually through 2026. Those cash flows should help the company meet its maturity schedule during the next five years, which cumulatively totals $7.2 billion, and also deleverage after the Kindred at Home transaction.

Bulls Say’s

  • With its prowess in Medicare Advantage plans, Humana looks likely to benefit from strong demographic trends and increasing popularity of that program. 
  • Humana enjoys industry-leading customer satisfaction metrics that positively influence its brand and reputation in the consumer-driven Medicare Advantage and Medicaid insurance sectors. 
  • Humana’s growth trajectory looks strong, with management aiming for 11%-15% EPS growth in the long run.

Company Profile 

Humana is one of the largest private health insurers in the U.S. with a focus on administering Medicare Advantage plans. The firm has built a niche specializing in government-sponsored programs, with nearly all its medical membership stemming from individual and group Medicare Advantage, Medicaid, and the military’s Tricare program. The firm is also a leader in stand-alone prescription drug plans for seniors enrolled in traditional fee-for-service Medicare. Humana offers employer-based plans primarily for small businesses along with specialty insurance offerings such as dental, vision, and life. Beyond medical insurance, the company provides other healthcare services, including primary-care services, at-home services, and pharmacy benefit management.

(Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Technology Stocks

ServiceNow’s Differentiated Software Drives Multiple Organic Growth Vectors in Expanding TAM

Business Strategy & Outlook:    

ServiceNow has been successful thus far in executing on a classic land and expand strategy. First, it built a best-of-breed SaaS solution for IT Service Management (ITSM) based on being modular and flexible, having a superior familiar user interface, offering a way to automate a wide variety of workflow processes, and becoming a platform to serve as a single system of record for the IT function within the enterprise. Having established itself in ITSM and then the much larger IT operations management, or ITOM, market, the firm moved beyond the IT function. The same set of product design features and technologies has allowed ServiceNow to bring its process automation approach to HR service delivery, customer service, and finance. More recently, ServiceNow has been offering higher pricing tiers with an increasing array of features, along with industry specific solutions, which have higher ASPs and help drive revenue growth. 

ServiceNow’s success has been rapid and notably organic. The company already offers high-end enterprise-grade solutions and boasts elite level customer retention of 97% to 98%. ServiceNow focuses on the largest 2,000 (G2K) enterprises in the world and these customers continue to renew for larger contracts, with the average annual contract value doubling in the last three years. Further, the company has no small business exposure. Additionally, customers overall are re-upping for more than one solution, as more than 75% of customers are multi-product purchasers, which is driving deal sizes higher. Having the IT function within an enterprise as the initial landing pad is fortunate, as it provides a built-in advocate for software (an IT responsibility) for other functional areas of the enterprise. ServiceNow will continue to use its position to land new IT-driven customers and upsell ITOM features on the platform, but the company will increasingly cross-sell emerging products in HR and customer service, along with the platform as a service (PaaS) offering. The product strength, market presence, and a strong sales push into areas outside of IT, will continue to drive robust growth.

Financial Strengths:  

ServiceNow is a financially sound company. Revenue is growing rapidly, while non-GAAP margins are positive and expanding. The continued traction in ITSM and ITOM, along with adoption of new use cases in customer service and HR service delivery, and the PaaS solution will continue to drive revenue growth in excess of 20% for at least the next five years. As of Dec. 31, 2021, ServiceNow had $3.3 billion in cash, offset by approximately $1.6 billion in debt, resulting in a net cash position of $1.6 billion. Gross leverage sits at 2.1 times trailing EBITDA, which allows for flexibility should the environment worsen. Operating margins are increasing as ServiceNow continues to scale, with 2019 the first year of profitability on a GAAP basis. ServiceNow should be able to drive in excess of 100 basis points of margin expansion annually. Free cash flow margin was 31% in 2021, providing a preview of what will be strengthening margins over the next decade. In terms of capital deployment, ServiceNow does not pay a dividend, does not regularly repurchase shares, and makes only small acquisitions. In fact, ServiceNow has spent only a few hundred million dollars on acquisitions in aggregate since 2011. The company made a variety of tuck-in acquisitions in 2019 and 2020–all for undisclosed amounts. Small, feature-driven acquisitions are expected to continue but have not explicitly modeled any such deals. The company might not initiate a dividend in the foreseeable future, nor regular share repurchases.

Bulls Say: 

  • ServiceNow’s superior product has led to rapid share gains and exceptional retention within the ITSM market. Now the company is using this strength to expand into other areas of ITOM.
  • The company has added additional growth drivers, including customer service and HR service delivery, which should help propel robust growth over the next five years.
  • GAAP operating margin was break-even for the first time in 2019 and see a decade-long runway for expansion.

Company Description: 

ServiceNow Inc provides software solutions to structure and automate various business processes via a SaaS delivery model. The company primarily focuses on the IT function for enterprise customers. ServiceNow began with IT service management (ITSM), expanded within the IT function, and more recently directed its workflow automation logic to functional areas beyond IT, notably customer service, HR service delivery, and security operations. ServiceNow also offers an application development platform as a service (PaaS).

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks

ADP Delivers Robust FY 2022 Result as Labor Markets Prove Resilient Despite Economic Headwinds

Business Strategy & Outlook

ADP has invested heavily over the past decade to develop public cloud native solutions and consolidate its portfolio of disparate platforms. As of fiscal 2021, ADP has successfully migrated most of its small and midsize clients to its strategic platforms and will be migrating enterprise clients to its new HCM platform over the coming decade, as well as rolling out its new underlying payroll and tax engines. While the platform migrations ultimately result in higher retention and profitability, the forced migrations will likely create a catalyst for enterprise clients to reassess providers, temporarily hindering both metrics. ADP faces fierce competitive pressure from nimble upstarts, legacy peers, accounting software, and ERP providers. The new solutions will allow ADP to compete more aggressively on functionality, reduce software maintenance costs, and provide scope for greater operating leverage, supporting margin uplift. However, the increasing competitive pressure will result in greater pricing pressure and force ADP to maintain high levels of investment to ensure the functionality of its product offering remains competitive. 

This investment is in addition to the continued investment in sales and implementation required to roll out new solutions and migrate clients. As such, the ADP’s price increases will be limited to about 0.5% a year on average, in line with recent growth but below long-term averages, limiting margin expansion potential. The increased regulatory complexity, tight labor markets, and growing adoption of hybrid work will underpin strong demand for ADP’s solutions, supporting greater share of wallet and market share gains in the small and midsize market. This includes greater penetration of the outsourced payroll and HR model. However, the expected forced platform migrations to hamper ADP’s enterprise market share growth over the next decade before gradually recovering as the new platform is adopted in the market. In aggregate, the ADP’s overall market share to grow modestly for the five years to fiscal 2027, followed by higher growth as platform migrations complete.

Financial Strengths

ADP is in a strong financial position. At the end of fiscal 2022, ADP’s balance sheet was modestly geared with net debt/EBITDA of 0.3. During fiscal 2021, ADP almost tripled long-term debt to $3 billion to fund share repurchases and optimize its capital structure with low cost debt. The expected ADP’s annual operating income can comfortably cover annual interest expense on its debt at least 60 times over the forecasted period. ADP also has access to short-term funding facilities to meet client’s obligations rather than liquidating available for sale securities. ADP has returned over $20 billion of capital to shareholders during the eight years to fiscal 2022 through dividends and share repurchases. The expected ADP’s strong free cash flow generation will support a dividend payout ratio of about 60% over the period. The balance sheet is robust, and ADP has ample scope to increase leverage to execute on bolt-on acquisitions.

Bulls Say

  • ADP benefits from high client switching costs, a scale based cost advantage, intangible brand assets, and a powerful referral network. 
  • Despite facing fierce competitive pressures and undergoing forced platform migrations, ADP has retained high revenue retention and improved operating margins over the past decade. 
  • ADP has a strong record of returning capital to shareholders through dividends and share repurchases.

Company Description

ADP is a provider of payroll and human capital management solutions servicing the full scope of businesses from micro to global enterprises. ADP was established in 1949 and serves over 990,000 clients primarily in the United States. ADP’s employer services segment offers payroll, HCM solutions, HR outsourcing, insurance and retirement services. The smaller but faster-growing PEO segment provides HR outsourcing solutions to small and midsize businesses through a co-employment model.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks Shares

Spotify may be at the mercy of the record labels in the music industry, as it will need access to content to continue attracting more listeners

Business Strategy and Outlook 

Swedish-based Spotify is the world’s leading music streaming service provider. The fast-growing digital streaming space as becoming the primary distribution platform of choice within the ever-changing music industry. Spotify can benefit from various network effects that will help the firm increase its users and amass valuable intangible assets associated with user data and listening preferences. However, it faces intense competition and has a (mostly) variable cost structure that may limit Spotify’s future operating leverage and profitability. It will not generate excess returns on capital over the next 10 years. Spotify may be at the mercy of the record labels in the music industry, as it will need access to content to continue attracting more listeners. While the distribution side of the industry (Spotify, YouTube, Apple, terrestrial and digital radio, and so on) is fragmented, over 80% of licensing is controlled by the big three major record labels: Universal Music Group, Sony, and Warner Music Group. As these licensors gather royalties from Spotify and its peers, they maintain pricing leverage as content remains king.

The firm’s entry into the podcast space is applaudable. However, while the firm has become the market leader via content acquisition, which further diversifies its revenue, its dependency on labels to be lessened much is not expected. Spotify is ahead of the pack in the growing music streaming and podcast markets, but it faces stiff competition from behemoths such as Amazon, Apple, and Google. Unlike Spotify, these firms don’t rely solely on streaming music or podcasts to drive profitability and can potentially run at break-even, or even as loss leaders, while monetizing users via other products and services. It might also be harder for Spotify to steal share from these competitors over time, as Apple Music and Apple Podcasts listeners are probably entrenched with other Apple products, Amazon Music with Echo, and so on. Thus, they might be relatively more loyal to these music and podcast platforms than the users an operating-system-agnostic platform like Spotify can capture.

Financial Strength

As of the end of 2020, Spotify did not hold any debt on its balance sheet. Spotify’s cash balance at the end of 2020 was $1.7 billion. Spotify has continued to generate cash from operations since 2016; although the firm has incurred hefty operating losses in recent years, cash flow has been better as a good portion of these costs, which are accrued fees to rights holders, have not yet been paid out in cash. While Spotify remains an asset-light business since it uses Google’s cloud platform for data storage and computing, the firm’s annual capital expenditure to be EUR 75 million-EUR 100 million, is likely necessary to provide additional services and tools on the creation side especially for new, up-and-coming, or independent artists. The firm is also likely to take the M&A route with similar objectives, as displayed by its various podcast acquisitions. The free cash flow is to equity/sales, to average around 6% the next 5 years.

Bulls Say’s

  • Spotify’s listener growth may help it negotiate much better terms with record labels over time. 
  • By investing in more services and tools for artists, Spotify may attract artists away from record labels and toward independent distribution, which may allow the company to pay lower royalties over time. 
  • Revenue growth during the next 10 years should accelerate as Spotify keeps investing in different content such as podcasts and video, attracting more users and advertisers.

Company Profile 

Spotify, headquartered in Stockholm, Sweden, is one of the world’s largest music streaming service providers, with over 150 million total listeners. The firm monetizes its users through both a paid subscription model, referred to as its premium service, and an ad-based model, referred to as its ad-supported service. Revenue from premium and ad-supported services represented 90% and 10% of Spotify’s 2017 total revenue, respectively.

(Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks

Equifax to focus on expanding use cases of income verification beyond mortgage to auto, card, and government service

Business Strategy and Outlook 

Along with TransUnion and Experian, Equifax is one of the big three credit bureaus. Given the fixed costs inherent in a data-intensive business, Equifax has been able to enjoy strong operating leverage from incremental revenue. As the U.S. credit bureau market is relatively mature, the company has been adding new capabilities and expanding its geographic footprint, both organically and through acquisitions. As an example of its bolt-on acquisition strategy, Equifax announced in January 2021 that it will acquire e-commerce fraud prevention platform Kount for $640 million. Kount builds on Equifax’s existing antifraud products and acquiring unique data and software assets makes sense.

Equifax’s star in recent years has been its workforce solutions segment, which is now its largest segment. Workforce solutions include income verification (primarily for mortgages), and don’t expect Equifax has meaningful direct competition for this service. Equifax’s competitive position to persist as the large amount of existing records and the difficulty of convincing employers to share employee information would be too tough for new entrants to overcome. In the years ahead, Equifax is to focus on expanding use cases of income verification beyond mortgage to auto, card, and government services. Workforce solutions also includes employers’ services, which consist of employee onboarding solutions, I-9 management, tax form services, and unemployment claims processing. Growth by acquisition in Workforce Solutions has also been a focus, most notably with its $1.8 billion deal to buy Appriss Insights. Equifax’s reputation took a beating after a well-publicized data breach in September 2017. This wasn’t the first time Equifax suffered a data breach; however, the depth and the breadth of the breach created ire among the public and showed that the company wasn’t prepared to handle customers’ data securely. Following the breach, Equifax has invested heavily in cybersecurity and incurred significant legal and product liability costs. Equifax has largely put the episode behind it.

Financial Strength

Equifax management has historically been reasonably conservative with the balance sheet, with leverage ratios (net debt/adjusted EBITDA) between 1.5 and 3.0 times in the past several years. Management has shown a willingness to increase debt after an acquisition. Following the acquisition of Veda in 2016, the leverage ratio went to 3.5 times, but the firm quickly paid some of its debt to reduce leverage. Following the data breach in 2017, leverage increased as the firm incurred significant costs related to the breach. At the end of 2021, Equifax disclosed that it had $4.5 billion in long-term debt and $0.2 billion of cash. On a net leverage basis, Equifax’s leverage at the end of the fourth quarter of 2021 was about 2.5 times. Given this and the fact that a significant subset of the company’s business is either not very economically sensitive or countercyclical, Equifax is on strong financial footing amid the coronavirus-induced macroeconomic uncertainty.

Bulls Say’s

  • The workforce solutions segment is a fast-growing business built on unique data and can contribute meaningfully to earnings growth. Equifax can increase use cases in non mortgage applications for income verification. 
  • Equifax’s business lines are capital-light, and incremental revenue tends to flow to the bottom line, generating high returns on invested capital and operating margin expansion. 
  • Equifax’s acquisitions can further solidify its moat and diversify its lines of business.

Company Profile 

Along with Experian and TransUnion, Equifax is one of the leading credit bureaus in the United States. Equifax’s credit reports provide credit histories on millions of consumers, and the firm’s services are critical to lenders’ credit decisions. In addition, about a third of the firm’s revenue comes from workforce solutions, which provides income verification and employer human resources services. Equifax generates over 20% of its revenue from outside the United States.

(Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks Shares

United Airlines will participate in the recovery of business and international leisure travel in 2022 and 2023

Business Strategy and Outlook 

United Airlines is the most internationally focused U.S.-based carrier by operating revenue, with almost 40% of 2019 revenue coming from international activities. Before the coronavirus pandemic, much of the company’s story focused on realizing cost efficiencies to expand margins. In the leisure market, United is to continue receiving yield pressure from low-cost carriers. While its basic economy offering effectively serves the leisure market, don’t expect the firm to thrive in this segment. United’s international routes will not be as pressured, but that international flights will be difficult to fill until border restrictions are lifted.

United Airlines will participate in the recovery of business and international leisure travel in 2022 and 2023. A recovery in business travel will be critical for United to maintain the attractive economics of the frequent-flier program. Business travellers will often use miles from a cobranded credit card to upgrade flights when their company is unwilling to pay a premium price. Banks are willing to pay top dollar for these frequent-flier miles, which provides a high-margin income stream to United. The COVID-19 pandemic has presented airlines with the sharpest demand shock in history, and much of the projections are based on assumptions around how illness and vaccinations affect society. A full recovery is expected in capacity and an 80%-90% recovery in business travel that subsequently grows at GDP levels over the medium term. United has considerably greater regulatory uncertainty than peer carriers due to its increased exposure to international travel, and summer of 2022 will be a critical test of international travel recovery for United.

Financial Strength

United has a roughly average debt burden relative to peer U.S. carriers, but an average airline balance sheet is not strong in absolute terms. United carries a large amount of debt, comparatively thin margins, and substantial revenue uncertainty. As the pandemic has wreaked havoc on air travel demand and airlines’ business models, liquidity has become more important than in recent years. The primary risks to airline investors are increased leverage and equity dilution as airlines look to bolster solvency while demand is in the doldrums. United’s priority after the pandemic will be deleveraging the balance sheet, but this will take several years because of the firm’s thin margins. United came into the pandemic with a reasonable amount of debt, with the gross debt/EBITDA ratio sitting at roughly 4.5 times in 2019. United, like all airlines, has materially increased its leverage since February 2020 and has issued debt and received support from the government to survive a previously unfathomable decline in air traffic. As of the fourth quarter of 2021, United has $33.4 billion of debt and $18.3 billion of cash on the balance sheet. Roughly break-even levels of profitability are in 2022 and profitability in 2023 and beyond, there is no leverage to increase considerably from here on out.

Bulls Say’s

  • United has renewed its frequent-flier partnership with Chase, potentially creating room for long-term margin expansion.
  • An increasing focus on capacity restraint across the industry, combined with structurally lower fuel prices, should boost airlines’ financial performance over the medium term. 
  • Leisure travellers have become more comfortable with flying during the COVID-19 pandemic.

Company Profile 

United Airlines is a major U.S. network carrier. United’s hubs include San Francisco, Chicago, Houston, Denver, Los Angeles, New York/Newark, and Washington, D.C. United operates a hub-and-spoke system that is more focused on international travel than legacy peers.

 (Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks

Sherwin-Williams is the largest provider of architectural paint in the United States

Business Strategy & Outlook

Sherwin-Williams is the largest provider of architectural paint in the United States. The company has approximately 4,800 stores and sells premium paint at higher price points than most competitors. Sherwin-Williams also sells its products in big-box stores and provides coatings for original equipment manufacturers. More than three fourths of Sherwin’s business occur in North America, with much of its international exposure acquired during the 2016 purchase of Valspar. The acquisition of Valspar has bolstered its previously modest retail presence, as Valspar’s long-standing relationship with Lowe’s led to an exclusive partnership for Sherwin in 2018. Sherwin also obtained Valspar’s industrial business, expanding its performance coatings segment. 

In Sherwin’s largest segment, the Americas group, it has maintained strong growth, even in developed markets, as it rolls out nearly 100 new stores every year throughout the Americas. Its strategic focus on building this segment has created a strong value proposition for contractors. Jobsite delivery, in-app ordering, and a capacity for high-volume orders save time for customers and allows for premium product pricing. Roughly 90% of sales in the Americas group are to professional painters with the remaining 10% to do-it-yourself consumers. The consumer brands segment markets Sherwin’s paint brands through retail channels, such as Menards, and is the exclusive provider of coating products to Lowe’s. It owns a variety of widely known brands such as Valspar, Purdy, Minwax, Krylon, Thompson’s WaterSeal, and Dutch Boy. The performance coatings business produces a diverse product mix and accounts for much of the firm’s global exposure. The segment sells everything from marine paints to airplane and fire-resistant coatings, many of which are custom-formulated to suit client needs.

Financial Strengths

The Sherwin-Williams has a sound capital structure, and its consistent free cash flow generation should easily support its debt-service requirements and future capital-allocation decisions. The firm’s leverage increased following its 2016 acquisition of Valspar. Management has made progress in reducing its debt, with net debt/EBITDA coming down to roughly 3.0 from 4.4 in 2017. Following Sherwin’s acquisition of Valspar and PPG’s 2018 acquisition of Comex, there are few North American paint companies that could be potential acquisition targets for Sherwin. One doesn’t anticipate Sherwin will make any sizable acquisitions in the near future as the firm focuses on its retail stores and Lowe’s partnership. Sherwin leverages its commercial paper program and credit facilities to fund a portion of its working capital and expenses. Because of this, the firm usually has less than $250 million of cash on hand. The firm has roughly $8 billion in outstanding debt with staggered maturities through 2052, but its next maturity isn’t until 2024 when roughly $500 million is due. Sherwin-Williams has a history of strong free cash flow generation, even in a downturn, which demonstrates the durability of its business model.

Bulls Say

  • Professional painters have favored Sherwin products for decades, leading to strong brand loyalty and pricing power. 
  • New residential construction and increased rental properties should provide strong tailwinds for residential coatings growth. 
  • The exclusive partnership with Lowe’s creates an additional avenue for Sherwin to sell its products to new customers without meaningful cannibalization risk.

Company Description

Sherwin-Williams is the largest provider of architectural paint in the United States. The company has approximately 4,800 stores and sells premium paint at higher price points than most competitors. Sherwin-Williams also sells paint-related products in big-box stores and provides coatings for original equipment manufacturers.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.